Evaluate whether growth led by household consumption is sustainable.
2.2 · 2.5
Sustainable- Consumption about 68% of GDP, yet growth has beaten Europe since 2019.
- Spending is backed by high incomes and record median income ($87,460, 2025).
- Strong demand encourages firms to invest in new technology.
Not sustainable- Low saving rate (around 4–5%) leaves households exposed to shocks.
- Spending leaks into imports: goods deficit $1.24 trn.
- Wealth effects reverse if share or house prices fall, as in 2008.
ChainShare prices ↑ → household wealth ↑ → confidence and borrowing ↑ → C ↑ → AD ↑ via the multiplier, but imports ↑ so (X−M) worsens.
JudgmentSustainable while productivity and incomes keep rising and foreigners keep lending. It becomes fragile when spending is financed by debt and asset bubbles rather than income.
Assess whether a large current account deficit is a problem for a developed economy.
2.1.4 · 4.1.7
A problem- Deficit every year since 1992; $1.12 trn in 2025.
- Net foreign liabilities of $27.5 trn; income paid abroad rises.
- Reflects lost manufacturing capacity and low national saving.
Not a big problem- Financed easily: the world wants dollar assets.
- Partly reflects strong investment and an attractive economy.
- Services surplus of $340 bn shows real competitive strengths.
ChainLow national saving + strong investment → spending exceeds output → imports exceed exports → current account deficit → financed by capital inflows into US assets.
JudgmentDepends on how it is financed and what it pays for. A reserve-currency country can run deficits for decades; a smaller economy borrowing in foreign currency could not.
Evaluate the economic effects of tariffs on the country that imposes them.
4.1.6
Benefits claimed- Tariff revenue rose sharply in 2025.
- Protects steel, cars and other strategic industries.
- Bargaining power: partners such as the EU agreed deals in 2025.
Costs- About $1,100 a year per household (Yale Budget Lab).
- Goods deficit still widened in 2025; trade diverted to Vietnam and Mexico.
- Retaliation hit farmers; uncertainty delayed investment.
ChainTariff ↑ → import prices ↑ → costs ↑ for firms using imported inputs and prices ↑ for consumers → real incomes ↓ → C ↓, while protected firms gain market share.
JudgmentTariffs cannot fix a deficit caused by low saving. The overall goods and services deficit stayed near $900 bn in 2025. Gains to protected producers are smaller than losses to consumers, as the welfare-loss triangles predict.
Evaluate the use of higher interest rates to control inflation caused by a supply shock.
2.6.2 · 4.4.3
Case for- CPI rose to 4.2% in May 2026 after four years above target.
- Stops a wage–price spiral and anchors expectations.
- Growth was solid (2.2% annualised in Q2 2026), so the cost is lower.
Case against- The shock is oil (petrol +27%); core CPI was only 2.4%.
- Rates do not raise oil supply; they cut output and jobs.
- Higher rates raise interest costs on $30 trn+ of federal debt.
ChainFed raises rates → borrowing dearer, saving more attractive → C and I ↓ → AD shifts left → lower inflation, but lower real output.
JudgmentCentral banks usually "look through" a one-off supply shock. Raising rates makes sense only if inflation expectations are drifting up, as the Fed feared after years above target.
Discuss whether high levels of government debt are a problem for a developed economy.
4.5.3
A problem- Debt held by the public 101% of GDP in 2026, rising to 120% by 2036 (CBO).
- Interest costs above defence spending.
- Moody's downgrade (2025); risk of higher bond yields.
Manageable- Borrows in its own currency; the Fed can act as backstop.
- Strong demand for Treasuries worldwide.
- Growth above many peers helps the debt ratio.
ChainPersistent deficits → debt ↑ → more bonds to sell → bond yields ↑ → interest costs ↑ and private borrowing costs ↑ (crowding out).
JudgmentThe key test is whether the interest rate on debt stays below the growth rate of nominal GDP. The US is safer than most because of the dollar, but rising interest costs reduce future fiscal space.
Evaluate the use of subsidies as a supply-side policy to build new industries.
2.6.3 · 1.4
Works- CHIPS Act ($52.7 bn) drew new chip factories to Arizona and Ohio.
- IRA tax credits triggered a wave of battery and solar plant announcements.
- Corrects positive externalities from R&D and clean energy.
Limits- Many clean-energy credits were cut in 2025; projects cancelled.
- High cost per job; firms may have invested anyway.
- Trading partners object and copy the subsidies.
ChainSubsidy → lower cost of investment → new plants and skills → productive capacity ↑ → LRAS shifts right.
JudgmentSubsidies work best when stable and targeted at clear market failures. The US case shows policy reversal can waste much of the benefit.
To what extent does a flexible labour market reduce unemployment?
2.1.3 · 2.6.3
It does- Unemployment fell from 14.8% (April 2020) to below 4% within two years.
- Rate stayed between about 4% and 4.5% in 2024–26.
- Firms hire easily because they can also fire easily.
Limits- Insecurity: low unemployment benefits, health insurance tied to jobs.
- Structural unemployment in former factory towns persists.
- Low pay at the bottom; working poor.
ChainLow hiring and firing costs → firms hire quickly when demand rises → shorter unemployment spells → lower frictional and cyclical unemployment.
JudgmentFlexibility cuts cyclical and frictional unemployment well. It does less for structural unemployment, which needs training and mobility. Compare Germany's short-time working scheme.
Discuss the causes of rising income inequality in developed economies.
4.2.2
Market causes- Technology raises returns to high skills and to tech owners.
- Globalisation cut low-skill manufacturing jobs.
- Rising asset prices: the top 1% hold ~30% of wealth.
Policy causes- Weak unions; minimum wage frozen since 2009.
- Tax cuts in 2017 and 2025 favoured higher incomes.
- Less redistribution than Germany or Norway.
ChainNew technology → demand for high-skill labour ↑ → wages for skilled workers ↑ faster than for others → wage gap widens → Gini ↑.
JudgmentTechnology and trade affect all rich countries, yet Norway's Gini is far lower. That points to policy (taxes, benefits, unions) as the deciding factor.
Assess the benefits to a country of its currency being the main global reserve currency.
4.1.8
Benefits- Cheap borrowing: global demand for Treasury bonds.
- Can run deficits for decades without a currency crisis.
- No exchange-rate risk on most trade, which is priced in dollars.
Costs- Strong dollar hurts exporters and manufacturing.
- Encourages over-borrowing.
- Reserve share slipping (71% to 56.7%).
ChainForeign demand for dollar assets → capital inflows → dollar stronger and bond yields lower → cheaper imports and government borrowing → but exports less competitive.
JudgmentThe benefit is large for borrowers and consumers. The cost falls on exporters and factory workers, which helps explain the political push for tariffs.
Evaluate the impact of a sharp rise in world oil prices on a developed economy.
2.1.2 · 2.3
Harmful- Petrol up 27% in the year to Aug 2026; CPI hit 4.2% in May.
- SRAS shifts left: higher costs for transport and airlines.
- Lower real incomes cut consumption.
Offset- The US is the top oil producer (13.6 m barrels a day, 2025).
- Shale firms earn more and invest more.
- Less damaging than for oil importers such as Germany.
ChainOil price ↑ → costs of production ↑ → SRAS shifts left → price level ↑ and real output ↓ (stagflation risk).
JudgmentShale has turned the US from a big oil importer into a net exporter, so a price rise now moves income between US households and US producers rather than abroad. The damage is smaller than in the 1970s.